Bank Lags on Inner-City Loan Results

The Los Angeles Community Development Bank has fallen far short of its mandate to channel loans to the inner city’s smallest businesses, with some loan programs failing to finalize a single deal, according to the federally funded bank’s annual business plan.

The frankly worded report, to be considered today by the City Council, outlines profound obstacles that have prevented the 3-year-old bank from fulfilling its mission: to revitalize the city’s depressed urban zones and create jobs by financing entrepreneurs shunned by conventional lenders.

The bank was expected to kick into high gear this year after getting off to a slow start in 1996. But so far, it has reached less than 40% of its 1998 lending goals. The disappointing showing is due largely to cumbersome federal requirements, a thriving economy that has left the bank with riskier clients and an unrealistic reliance on struggling nonprofit organizations to get smaller loans onto the streets.

Most frustrating for bank and community leaders: The bank is sitting on more than $300 million that it has been unable to put to work reversing stagnation.

Now bank officials are seeking to ease federal restrictions on their money, pushing big banks to come up with pledged support, and marketing their loans to unaware inner-city business owners. They are also recognizing that for the bank to succeed, it must find a way to teach business savvy to borrowers--many accustomed to storing receipts in shoe boxes.

Granted as a consolation prize to riot-scarred Los Angeles after the city’s stinging failure to win a federal empowerment zone--later awarded--the bank aimed to finance the inner city’s great sea of unbankable businesses. While officials point to nearly $50 million in mostly larger loans and 700 jobs created or retained since its inception as evidence of some success, they acknowledge they are hamstrung in their efforts to finance smaller deals crucial to economic development.

They now say expectations that the bank would serve as a panacea for blighted Los Angeles were overblown. As of last month, the bank had reached 39% of its lending goals for 1998, with smaller loan programs faring much worse. The micro-loan program--responsible for loans below $25,000--reached less than 25% of its goals, and a program that markets loans between $25,000 and $500,000 closed just one deal.

In addition, seven community organizations charged with helping borrowers put together loan paperwork had not completed a single deal, saying the bank’s products were too hard to market.

“The challenge of getting these loans out is a lot tougher than we expected,” bank Chief Executive C. Robert Kemp said. “There needs to be a tremendous amount of resources brought to bear on the empowerment zone in addition to what is being provided by the [bank].”

The bank has made some admitted blunders in its struggle to implement the federal government’s largest inner-city lending initiative. In response, bank officials are streamlining cumbersome loan applications, removing some restrictions from borrowers and implementing a monitoring program that can catch failing businesses before they go under. They also are working to better understand key industries such as apparel and food processing after unrolling a targeted loan program last fall that generated almost no response.

A handful of borrowers have leveled bitter criticism against the bank, alleging that undercapitalization and micro-management by bank officials sped their demise--charges the bank denies. Many key hurdles, however, fall outside the bank’s control.

Crafted in the recession when no lenders would touch the inner city, the bank now finds itself operating in a healthy economy. Commercial banks and the federal Small Business Administration are making smaller and riskier loans with faster turnaround time, leaving the Community Development Bank to choose from the riskier borrowers.

“They may be in that void where if they extend the loan it is so risky that they aren’t going to get paid back and will lose capital, and if they attack the marketplace at a level where risk is acceptable they aren’t going to generate enough transactions,” said Bob McNeely, senior vice president and manager of community development for Union Bank of California.

The answer to the bank’s problem, officials insist, is to help turn novice borrowers into good risks, “seeding the pipeline” for other lenders. But funding that kind of hand-holding has not been part of the bank’s budget.

“We have not been given the right kind of resources to make these businesses bankable while at the same time not blowing the [government’s] money,” said bank board member Denise Fairchild.

Meanwhile, borrowers are balking at federal restrictions that make the bank’s loan process “a bureaucratic nightmare,” Kemp said. Borrowers must be located in the empowerment zone, hire at least 51% of their workers from within the zone and create or retain one job for every $35,000 in loans.

They must also provide a letter showing that a commercial bank has rejected them. Those who can turn elsewhere do.

The bank faces another problem. The task of getting loans below $250,000 out to the street falls to financial intermediaries--mostly scrappy nonprofits that don’t have the resources to get the job done. In response to their complaints, the bank is funding a marketing program and streamlining its application process.

But the bank pays intermediaries only if a loan is funded, not for the hundreds of hours of hand-holding they often perform--even when a loan is rejected.

Kemp said he is hoping the big commercial banks will fill the gap and fund technical help programs. He has approached Union Bank, Bank of America and Wells Fargo with that and other proposals that would allow the lenders to earn required community redevelopment credits without underwriting risky loans.

The three banks together pledged $210 million in 1995 but have not delivered, saying no deals have met their risk standards.

Despite the challenges, Kemp said the bank’s performance is slowly improving.

By last month it had finalized $22 million in 1998 loans, for a total of $47 million since its inception. Officials are scrambling to close millions more by year’s end.

But the loan figure is distorted by a massive deal to one borrower, Copeland Beverage Group, a South Los Angeles dairy that came close to defaulting last summer. The bank initially committed $6 million to the dairy, an amount that mushroomed to $15 million as the dairy struggled to right itself.

The size of the deal--an estimated $136,000 per dairy employee--has prompted critics to question the bank’s economic development strategy.

Other deals have prompted bitter complaints from borrowers who allege the bank stood by as they failed. Among them is Trinity Knitworks, the bank’s first borrower.

Trinity, accused by its workers and state officials of being a sweatshop and owing more than $200,000 in back wages, folded in October.

Partly in response to the Copeland and Trinity deals, the bank has launched a loan-monitoring process to spot problems before they become critical, Kemp said.

Bank Chairman Antonio Gonzalez said many of the 64 borrowers would never have had a chance at financing without the bank’s help.

“I’m not going to tell you that what we’re doing is perfect, but there’s no one else who’s doing it,” he said. “We’re moving real money.”

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Times staff writer Patrick J. McDonnell contributed to this report.